Many potential homeowners with low FICO scores find
themselves denied by banks when they try to qualify for a mortgage. Nearly 1 in
4 Americans have a FICO score of less than 640 which is considered to be a
subprime credit score. With a subprime score it can be difficult to qualify for
a traditional home loan. However, there are other options available for a subprime mortgage Arizona. Certain loan
types and programs can help borrowers with low credit scores qualify for a home
loan.
One loan type that is available for subprime borrowers is a
bad credit FHA loan. An FHA loan is backed by the Federal Housing Authority and
will allow you to borrow about 96.5% of the value of the home you are
purchasing. This means that you won’t have to come up with a large sum of money
for a down payment. In addition, the government backing means that you will be
more likely to qualify, even with less than stellar credit. This is because the
government helps secure the loan for the bank in case of default. One important
note is that you will pay monthly insurance on your loan. In additional to you
principle and interest payments, you will also pay a PMI insurance payment.
This is basically extra money you pay to help insure against default. PMI
payments can range from $80 to over $200 each month, depending on the amount of
the loan.
A second type of loan available to borrower with bad credit
is a subprime mortgage Arizona. A
subprime loan refers to a loan given to a borrower that represents a greater
financial risk due to his/her credit score. A subprime loan is funded by a bank
but does not have to meet the same underwriting guidelines as a prime loan.
Subprime loans allow access to groups that would normally not have access to
the credit market like people with low FICO scores. The most popular type of
subprime loan is an adjustable rate mortgage or ARM. In an ARM, the initial
interest rate is usually low but then adjusts after a period of time to above
the prime rate. The low interest rate is usually locked in for anywhere from
2-5 years and can be as low as 2.5%. After the lock in period, the rate adjusts
and can be as high as 10%. An ARM is a good option for borrowers who know they
will have the credit to refinance to a traditional loan after the adjustable
period or for borrowers who only intend to live in the home for a short period
and sell the property before the rate adjusts.
Bad Press and Subprime Mortgages
Although a subprime mortgage can be a valuable tool in
helping secure a home loan, many borrowers shy away from them due to recent
negative press. Specifically, in Arizona, many politicians have gone as far as
to label subprime mortgages as predatory lending practices. They claim that
subprime loans are designed to charge high interest rates for people who cannot
afford them. Proponents of subprime mortgage Arizona programs
claim that subprime loans allow individuals access into the home marker who
would otherwise be shut out due to credit history.
So, who is right? Is a subprime loan a predatory tool used by banks, or is it a legitimate loan program to help bad credit borrowers?
One argument made by politicians looking to discredit
subprime lending in Arizona is that it unfairly discriminates against low
income borrowers. This is simply not true, most subprime borrowers in Arizona
are above the median income line. Most subprime mortgages tend to be second mortgages
that are purchased as investment properties. Subprime borrowers also own fewer
low value homes than traditional mortgage holders.
A second claim against subprime ortgage Arizona is that minority borrower will be discriminated against
and only offered high interest loans. A demographic study indicates that this
is untrue. By analyzing zip codes and demographics, it was concluded that
subprime mortgages are not more common in zip codes with a Hispanic population
concentration.
Finally, another criticism is that subprime loans are
unfairly given out to borrowers who are young without a substantial credit
history. Subprime mortgages are not given out to mostly young borrowers. In
fact, the average age of a borrower for a subprime mortgage was between 35 and
55 years of age. This indicates that subprime mortgages are not being used to
penalize borrowers with insufficient credit history due to age.
When you examine the numbers, it becomes apparent that a
subprime mortgage is not used by lenders to make money from the lower class.
Rather, a subprime mortgage is a tool that can help
individuals with bad credit access the home buying market. If your credit score
is less than 640, don’t lose hope. Contact a mortgage broker to discuss your
subprime and non-traditional loan options.
Dennis Dahlberg
Level 4 Funding LLC
23335 N 18th Drive
Suite 120
Phoenix AZ 85027
NMLS 1057378 AZMB 0923961
623-582-4444